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Emissions trading system reform approved by Member States

27.12.2017

Today, ambassadors of the European Union Member States approved the reform of the trading scheme for greenhouse gas emission allowances, which is expected to reduce greenhouse gas emissions in the industrial and energy sectors faster.

‘The agreement on the trade system reform is a great triumph for Estonia. The renewed trading system must help reduce greenhouse gas emissions quicker, which is also beneficial for countries benefitting from trade, including, of course, Estonia,’ said Siim Kiisler, Minister of the Environment. Negotiations for reforming the highly complex system lasted for more than two years.

For the trading system to meet its aim, the price of a CO2 credit should rise to a level that would encourage companies to invest in production efficiency and greenhouse gas emission reductions. However, the price of CO2 credits has been relatively low for some time now. As of 2021, the total amount of carbon credits will be reduced by 2.2% a year instead of the current 1.74%. An increasing demand for credits should also lead to price increases.

‘Countries in the trading system will benefit directly from higher-priced trading, as proceeds from trade go directly to the countries. In Estonia, the money received from the sale of credits has been used to support improvements in the energy efficiency of apartment buildings, the introduction of renewable energy in small houses, and the renovation of heating systems. Contributions to international climate cooperation have also been made,’ said Kiisler.

In order to prevent the industry from moving out of the European Union and to ensure that companies are able to compete with non-EU competitors, the industrial companies participating in the trading system will receive some credits free of charge. Companies in the Estonian industrial sector (e.g. shale oil, cement and paper production) will also receive a portion of carbon credits free of charge. As an exception, the allocation of free credits to district heating will continue in small volumes.

‘Free credits for electricity production have not been allocated since 2013, which means that the electricity produced from oil shale will become more expensive with the increase in the price of CO2 credits. However, people and companies in Estonia can choose their electricity supplier from an open electricity market, and the price of electricity on the market will develop through competition, similarly to other goods and services,’ Kiisler explained.

In order to assist industrial and energy sectors with the transition to a low-carbon economy, several funds will be created, which Estonia will be able to receive and hence make industries more modern and more competitive.

The trading system reform will help the European Union achieve its target of decreasing greenhouse gas emissions by 40% by 2030 compared to 1990, as agreed in the Paris Climate Agreement. The industrial and energy sectors account for just under half of the European Union’s greenhouse gas emissions.

As at 2017, approximately 11,000 European Union’s industrial companies and energy producers are involved in the trading system, including 46 Estonian electricity and heat producers, shale oil, cement, paper and paper pulp manufacturers, and brick, lime, and glass producers.

Now that Member States have approved the draft, voting in the European Parliament will follow. The final step is adopting the draft at a Council meeting.

Background

The carbon trading system serves to motivate companies to reduce their greenhouse gas emissions. A company participating in the trading system will receive a certain amount of carbon credits free of charge depending on its area of activity; the remaining credits will be auctioned and the proceeds will be distributed proportionally among the countries.

As the amount of free credits is gradually reduced, companies need to buy credits from the trading system, and it is reasonable to invest in making production more efficient and hence decrease the amount of greenhouse gases.

In 2017, the maximum amount of greenhouse gas emissions allowed by the trading system is 1.9 billion tons. Almost half of it is allocated to businesses, and the missing credits are bought at auctions primarily by electricity producers. The more a company’s emissions increase, the more credits need to be bought, which will also increase the company’s expenses.

For example, in 2016, Estonian companies were allocated 2.4 million credits, but the actual emissions amounted to 13.4 million tons of greenhouse gases. Therefore, Estonian companies had to buy 11 million credits.

The Member States of the European Union have agreed that by 2030, the level of greenhouse gas emissions in the EU must be reduced by at least 40% compared to 1990 levels. To this end, emissions must be reduced in both the industrial and energy sectors that are part of the emissions trading system (ETS), but also in non-trading sectors (ESRs, Effort Sharing Regulations), i.e. in transport, agriculture, waste management, industrial processes and small-scale energy production (including energy saving in buildings) as well as in land use, land-use change and forestry (LULUCF).